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Double bottoms generate excellent swing trades when price first thrusts toward the last relative highANALYZING THE MARKET PATTERN CYCLES Original market analysis must uncover high probability setups, point to exact entries and tell swing traders when they’re wrong. It must apply to all time frames, be intuitive, and support accurate, real-time decision-making. This versatile tool must work through all markets, provide continuous feedback, and make trading simple yet profitable. Pattern Cycles fulfill these demanding characteristics. They provide a complete, powerful method to locate opportunity regardless of market conditions. These classic stages evolve as the charting landscape repeats common and predictable elements. Since markets cannot travel upward to infinity or downward below zero, well-marked ranges evolve within each time frame. Trends slowly awaken at these narrow levels and shoot forward in emotional waves. Stocks and their related charts cycle through a finite number of bull and bear conditions. Price bars shape common patterns over and over again through impulses that may last only a few seconds or persist for decades. When swing traders recognize the separate stages of this market evolution, their skilled vision awakens to a world of low-risk opportunity. Learn the well-marked steps of Pattern Cycle development and discover the hidden language of the master pattern. Chart polarity appears everywhere in the financial markets. Pattern Cycles feed off this axis to simplify decision-making. Use their mechanics to register market trends quickly and see profit setups at logical interfaces. They offer a potent visual tool that unites left and right brain functions. The pattern-trained eye intuitively sees natural execution levels that can then be verified through objective measurement. No complex or math-driven trading system will respond more quickly to changing price in real-time market conditions. Pattern Cycles evolve through the engine of greed and fear. The emotional crowd acts in a predictable manner through chart patterns. This herd behavior translates into directional movement that offers a rich source for profits. But the swing trader must first define a competitive relationship with the crowd as part of every new analysis. This requires an understanding of how insiders may fade popular response to obvious trading opportunities. Look for a low-risk execution target (ET) in each Pattern Cycle setup. This elusive trigger identifies the optimum price, time, and risk parameters for each intended entry. Find this important action level through analysis, experience, and common sense. Then determine whether the next few sessions should activate its specific criteria. If not, filter out the setup and move on to the next pattern. Never compromise an ET to force a position. Use it as a situational filter to avoid very bad timing. BOTTOMS Bottoms print as a direct result of Pattern Cycle physics. The natural movement of impulse and reaction dictates that two unique formations must develop at some point within each cycle. In an uptrend, a lower high will eventually follow a higher high and mark a new top. In a downtrend, the sequence of lower lows will finally end when price forms a higher low. This second event marks the birth of the double bottom. Double bottoms draw their predictive power from the trends that precede them. Downtrends often accelerate as a series of lower lows prints on a bar chart. The trading crowd notices and develops a gravity bias that expects the fall to continue unabated. Then suddenly the last low appears to hold. The crowd takes notice and bottom fishers slowly enter new positions. Apparent price stability triggers more players to recognize the potential pattern and jump in. Stock percentage growth potential peaks at the very beginning of a new uptrend. For this reason, being right at a bottom can produce the highest profit for any trade. But picking bottoms can be a very dangerous game. Swing traders must weigh all evidence at their disposal before taking the leap and exercise strict risk discipline to ensure a safe exit if proven wrong. Losses must be taken immediately upon violation of the prior low. Double bottoms generate excellent swing trades when price first thrusts toward the last relative high (center peak), and after that level becomes a base of support for the next move upward. The Adam and Eve bottom illustrates the center peak’s importance in the creation of this classic reversal. A very sharp and deep first bottom (Adam) initiates this pattern. The stock then bounces high into a center retracement before falling into a gentle, rolling second bottom (Eve). Price action finally constricts into a tight range and the stock breaks out strongly to the upside. Many times Eve’s top prints a flat shelf that marks an excellent entry point. Shelf resistance typically develops right along the top of the center retracement pivot. The relationship between this center pivot and current price marks the important focal point as the swing trader closely watches the development of the suspected pattern. Manage risk defensively—bottoms occur in downtrends. The greedy eye wants to believe the immature formation, and fast execution fingers may bypass better judgment. Even spectacular reversals offer little profit if price can’t ascend back out of the hole it came from. Violation of the prior low presents the natural first choice for stop loss. Make certain the entry permits a safe exit for an acceptable loss at this location. Don’t stick around long if the uptrend begins to fail. Price will gather downside momentum quickly at broken lows as it searches for new support. Successful bottom entry requires a strong stomach. Highly negative sentiment infects these volatile turning points even when all S/R and other technicals line up. But the profit potential for these classic setups presents very high reward:risk. In addition to new longs ready to speculate on a good upside move, high short interest will fuel explosive impulses off these levels. Perhaps for this reason alone, swing traders must explore the secrets of double bottom execution. Rounded bottoms also provide opportunity for patient traders. Enter a long position after momentum clearly shifts back toward the positive, but realize that it may take some time for a profit to grow. Better yet, use rounded bottoms to identify bear markets that wash out and gear up for a new bull leg. The formation supports a very stable base for price to move upward once the pattern completes. The Big W reference pattern maps the entire bottom reversal process. This signpost identifies key pivots and flashes early warning signals. The pattern begins at a market’s last high just prior to the first bottom. The first bounce after this low marks the center peak of the W as it retraces between 38% and 62% of that last downward move. This rally fades and price descends back toward a test of the last low. The swing trader then waits patiently for the first bell to ring. A wide range reversal bar (preferably a doji or hammer) may appear close to the low price of the last bottom. Or volume may spike sharply but price holds firm. Better yet, a 2B reversal prints where price violates the last low by a few ticks but then bounces sharply back above support. Focus attention on the potential second leg of this Big W when any or all of these events occur. Initiate entry near the bottom of this second leg when multiple cross-verification supports the trade and conditions permit tight stop loss. The middle of the W now becomes the central analysis point for further setups. Price must retrace 100% of the last minor decline to jump to this level. This small move finally breaks the descending bear cycle. Enter less aggressive positions when this emerging second bottom retraces through 62% of the fall into the second low. But sufficient profit must exist between that entry and the top of the W center pivot for the setup to make sense. Longer-term participants can hold positions as price tries to mount this barrier but most traders should exit immediately. Expect another upward leg after support establishes along the center pivot. The break of the downtrend invites many new players, and price has a high probability of rising further. Look for the next thrust to retrace 100% of the original downward impulse that pushed price into the first bottom. This final move completes both the double bottom and the Big W. The pattern may provide further opportunity on a quick pullback, but extended congestion can form in this area before trend pushes much higher. So assume a defensive posture and wait for the market to signal the next direction. BREAKOUTS Significant declines evolve into long basing periods characterized by failed rallies and retesting of prior lows. But as new accumulation slowly shakes out the last crowd of losers, a bear market’s character changes. Price starts to rally toward the top of key resistance. Short-term relative strength improves and the chart may print a series of bullish bars with closing ticks near their highs. Finally, the issue begins a steady march through the wall marked by previous failures. Stocks must overcome gravity to enter new uptrends. Value players build bases but can’t supply the critical force needed to fuel strong rallies. Fortunately, the momentum crowd arrives just in time to fill this chore. As a stock slowly rises above resistance, greed rings a loud bell and these growth players jump on board all at the same time. The appearance of a sharp breakout gap has tremendous buying power. But the swing trader must remain cautious if the move lacks heavy volume. Bursts of enthusiastic buying must draw wide attention that ignites further price expansion. The gap may fill quickly and trap the emotional longs when significant volume fails to appear. Non-gapping, high-volume surges provide a comfortable breakout floor similar to gaps. But support can be less dependable and force a stock to swing into a new range rather than rise quickly. Moderate strength breakouts often set up good pullback trades. The uptrend terrain faces considerable obstacles marked by clear air pockets and congestion from prior downtrends. These barriers should force frequent dips that mark good buying opportunities. The swing trader must identify these profitable resistance zones in advance and be ready to act. Look for price to shoot past the top Bollinger Band just as it strikes a strong ceiling. This should define the most likely turning point. Then follow the price correction back to natural support and look for low-risk entry. Price surges register on trend-following indicators such as MACD and ADX as momentum builds. Volatility quickly absorbs each new thrust and vertical rallies erupt. Abandon dip setups once this starts and try to catch these runaway expansion moves by shifting down to the next-lower time frame and finding small support pockets. Volume peaks as a trend wave draws to a climax while price expands bar to bar and often culminates in a final exhaustion spike. Markets need time to absorb instability generated by rapid price movement. They pause to catch their breath as both volume and price rate of change drop sharply. During these consolidation periods, new ranges undergo continuous testing for support and resistance. To the pattern reader, these appear as the familiar shapes of flags, pennants and triangles. Relatively simple mechanics underlie the formation of these continuation patterns. The orderly return to a market’s mean state sets the foundation for a new thrust in the same direction. Price pulls back with declining volume but does not violate any significant support. The primary trend reasserts itself as stability returns. Congestion tends to alternate between simple and complex patterns in a series of sharp trend waves. This odd phenomenon occurs in both range time and size. For example, the first pullback after a rally may only print 8-10 bars in a tight pattern while the subsequent congestion exhibits wide price swings through 20-25 bars. Always take a look back at the last range to estimate the expected price action for the new congestion. Trade more defensively if the prior pattern was both short and simple. Go on the offense after observing an extended battle in the last range. Swing traders must pay close attention to proportionality when examining continuation patterns. This visual element will validate or nullify other predictive observations. Constricted ranges should be proportional in both time and size to the trends that precede them. When they take on dimensions larger than expected from visual examination, odds increase that the observed range actually relates to a broader trend than the rally just completed. This can trigger devastating trend relativity errors, in which traders base execution on patterns longer or shorter than the targeted holding period. Evaluate all patterns within the context of this trend relativity. A constricted range exists only within the time frame under consideration. For example, a market may print a strong bull move on the weekly chart, a bear on the daily, and a tight continuation pattern on the 5-minute bars, all at the same time. A range drawn through one time frame does not necessarily signal swing conditions in the other periods that particular market trades through. |
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